ICC – FRAUDNETDevelopments in the new Swiss Codes of Civil

and Criminal Procedure Affecting Fraud Recovery

Palliser Hotel, Alberta Room133 – 9th Ave SW, Calgary, Alberta

Friday, October 1, 2010

Yves Klein, Monfrini Crettol & Associés, Geneva, SwitzerlandMichele Caratsch, Baldi & Caratsch, Zurich, Switzerland

Baldi & Caratsch, Zeltweg 44, CH- 8032 ZurichTel: +41 44 205 25 25 Fax: +41 44 205 25 00e-mail: mcaratsch@bclaw.ch

Monfrini Crettol & Associés, 3, place du Molard CH-1204 Geneva

Tel: +41 22 310 22 66, Fax: +41 22 310 24 86e-mail: yklein@mcswisslaw.com

Overview1. General introduction: The New Federal Code of Civil Procedure and the

New Federal Code of Criminal Procedure

2. Principal aspects of the new Code of Criminal Procedure affecting Fraud Recovery

3. New Code of Civil Procedure: changes affecting banking secrecy issues

4. Taking of evidence: "Discovery" in Swiss proceedings?

5. Use of illegally obtained evidence in Swiss civil proceedings

6. Conservatory Measures: the new grounds for attachment; new possibility of freezing state assets on the basis of an enforceable award under the new Lugano Convention

From 27…

In the 1874 Swiss constitution, both judicial organization and procedure were within the competence of the 26 cantons, each of which had its own codes of civil and of penal procedure. In addition, the Confederation also had its own codes of civil and of penal procedure, leading to t o the existence of 27 distinct sets of rules, more than in the whole European Union.

… to 1

On 8 October 1999, the Federal Constitution was amended, attributing the Confederation exclusive competence over criminal and civil procedure (judicial organization and administration of justice remain within the competence of cantons).

Swiss Code of Civil ProcedurePrincipal characteristics:

a. Encouragement of mediation and conciliation; simplified proceedings for small cases (below CHF 30’000).

b. Enhancement of third party intervention.

c. Investigation entirely conducted by the judge.

d. Power to issue production orders to third parties.

e. Lifting of bank secrecy as the rule.

f. No discovery or pre-trial discovery.

g. No class action (judge may consolidate actions).

Swiss Code of Criminal ProcedurePrincipal characteristics:

a. Prosecutor model: conducts both the investigation and the prosecution (no more Investigating Magistrates).

b. Enhanced rights of the defence.

c. Enhanced rights of the victim.

d. No jury.

e. Possibility of default judgments.

f. Plea bargaining through simplified procedure and sentencing orders.

g. Since 2000, compulsory federal jurisdiction over money laundering, corruption and organized crime, when mainly carried out abroad or in several cantons.

2. Aspects of the Swiss Code of Criminal Procedure relevant for fraud victims

Investigation

Prosecutor has the power (without court orders) to:

•interrogate witnesses

•issue production orders (no banking secrecy)

•issue freeze orders to guarantee forfeiture

•issue MLAT letters of requests

Freeze orders

Freeze order issued to guarantee:

•forfeiture of crime proceeds or replacement assets

•not compensation of the victim’s damage

Freeze orders may be generic and may take the form of blanket orders in cases of organized crime & grand corruption

Forfeiture of assetsCompulsory forfeiture of:• crime proceeds or assets intended to reward or bring

about an offence• when crime proceeds are no longer available, forfeiture

of replacement assets of the same owner (beneficial ownership test; no privilege towards other creditors)

• assets under the control of a criminal organization; assets beneficially owned by persons who participated in or supported a criminal organization are presumed to be controlled by the organization until proof of the contrary (either proof of lack of control or of legitimate origin)

Third parties protectionThird parties are only protected from forfeiture if both:– ignorant of their criminal origin;

and

– provided adequate consideration for the assets

Forfeiture may be waived if it would represent an excessive hardship on the third party.

Forfeiture procedure

• Together with a conviction.

• Non conviction-based forfeiture: compulsory when no trial takes place; forfeiture order issued by prosecutor; no other condition than proof of the criminal origin of the assets and Swiss juridiction over the offences.

The plaintiff

Upon declaration, any individual or legal entity whose rights were directly affected upon the commission of a crime.

Not the shareholder or the assignee (rights limited to civil action in subrogation).

Plaintiff’s right to participate in the investigation:

• Right to consult the file and levy copy, granted at the latest when the suspect has been examined for the first time (may be limited to prevent abuses).

• Right to use evidence in domestic & foreign proceedings.• Right to request freeze orders.• Right to request investigative measures and participate

in the examination of witnesses or suspects.• Right to appeal against the prosecutor’s decision and to

support the prosecutor’s decision in case of appeal by the suspect or a third party.

Plaintiff’s right to sue for damages:

• Plaintiff has the right to sue the accused for damages before the criminal court. Civil law (including level of proof) applies (court fee must only be paid at that stage).

• Plaintiff may support the prosecution in the criminal trial and reserve its right to sue before Swiss or foreign civil courts, using the evidence obtained in the criminal proceedings.

Plaintiff’s right to the allocation of the forfeited assets

• Article 73 of the Penal Code:

If a felony or an offence has caused damage not covered by insurance and if it must be presumed that the offender will not compensate it, the injured person is entitled to receive, upon request, up to the amount of the damages established by a judgment or by agreement the forfeited assets, the replacement assets and the fines paid by the offender.

3. Changes affecting banking secrecyin the Swiss Code of Civil Procedure

Current situation

• Today, most Swiss cantonal codes of civil procedure do not allow production orders against third parties or the lifting of bank secrecy.

• Consequence: criminal proceedings are necessary to obtain evidence.

General obligation to cooperate

• Article 160 SCCP introduces a general obligation for parties and third parties to cooperate with the civil trial.

• In principle, banking secrecy cannot be opposed (contrary to attorney-client confidentiality).

• Consequence both on domestic and civil mutual assistance proceedings.

Relative right of refusal:

Art. 163 para. 2 SCCP:

“[Parties] privy to other secrets that are protected by law can refuse to cooperate if they show that the interest in maintaining secrecy overrides the interest in discovering the truth.”

Consequence of unjustified refusal: taken into account when weighing evidence (art. 164 SCPP).

Art. 166 para. 2 SCCP:

“Other persons aware of statutorily protected secrets can refuse cooperation if they show prima facie that the interest in maintaining secrecy overrides the interest in discovering the truth.”

Consequence of unjustified refusal: fine, threat of imprisonment, order compliance by force, costs (art. 167 SCPP).

Lifting of banking secrecy is the rule:

• Bank secrecy is lifted unless the party or third party barred by secrecy law from disclosing the information or document can show that there is an overriding interest to maintain secrecy.

• However, banks have declared that they will systematically exert their right of refusal to make sure that they have a court decision protecting them from liability.

Consequence on domestic proceedings

• In the less complex cases, criminal proceedings may no longer be necessary.

• Criminal proceedings still necessary for transnational, complex cases.

Consequences on civil international judicial assistance

Requests for taking evidence sent to Switzerland are governed by:•The Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters (Swiss declaration under article 23: limitations on pretrial discovery)•The Hague Convention relating to civil procedure of 1 March 1954 (applies also when the requesting State has no treaty with Switzerland)

Law applicable to the execution of the request:

• Today, requests are executed in accordance with the code of procedure of the canton of execution (art. 11 PILA).

• From 2011 on, the Swiss Code of Civil Procedure shall apply.

• By providing sufficient elements in the request, bank documents may be obtained in Switzerland (see 4A_399/2007).

Elements to provide in the request:

• Facts of the case sufficiently detailed to allow the Swiss court to effect a balance of interest between secrecy and truth.

• Specify which documents are requested (no discovery-like exploratory requests).

• Parties may participate in the examination of witnesses but not in the production of documents.

4. Taking of evidence:

"Discovery" in Swiss proceedings?

Taking of evidence: "Discovery" in Swiss proceedings?

• Admissible types of evidence under Art. 168 SCCP:

(1) Witness evidence(2) Documentary evidenceDocumentary evidence(3) Inspection by court (4) Expert evidence(5) Written request by the court(6) Parties’ interrogation by the court and testimony

under oath

Differences to common law system

• The concept of pre-trial discovery or gathering of evidence prior to the trial by way of taking depositions of witnesses or mandatorily exchanging or producing documents is completely unknown and will continue to remain unknown under the new code of civil procedure.

• Affidavits or witness statements filed by a party have no evidentiary value unless backed up by “live” evidence given in front of the court.

• Evidence is taken by the court after the parties have submitted in full, usually by exchange of written briefs, their allegations of facts. The court will take evidence on all of those facts which are either alleged or disputed.

• The administration of the evidence, including the questioning of the relevant witnesses, is reserved to the court. Parties' counsels may ask additional questions to any witnesses which are being questioned by the court, but this only after the court has made its own enquiries and authorizes parties' counsels to proceed. NO concept of cross-examination.

Codified duty of the parties to produce documents

• Art. 160 sec. 1 (b) SCCP contains a general obligation for the parties and third parties to cooperate with the courts, including the duty to produce duty to produce documentsdocuments at the request of the court.

• General guideline: IBA Rules on the Taking of Evidence in International Commercial Arbitration of 1999:

• Documents to be released must be in possession, custody or control of the party from which they are requested

• The documents must be sufficiently identified by the requesting party – no fishing expedition

• Request must be formulated during the proceedings – no pre-trial discovery• Order of production is issued by the Court – release of documents only to

the Court, not directly to the requesting party. • Side note: A defendant cannot be compelled by either the court or the

adversary to disclose its assets. Disclosure of assets presupposes a final judgment or enforcement document against the defendant, and is only possible within the framework of compulsory enforcement under the DCB.

Legal Privilege?• Art. 160 sec. 1(b) newly introduces the concept of legal privilege:

• NOT ONLY ATTORNEYS CAN REFUSE TO PRODUCE THEIR OWN PRIVILEGED DOCUMENTS, BUT ALSO CLIENTS CAN REFUSE TO PRODUCE COMMUNICATION WITH THEIR ATTORNEY WHICH IS PRIVILEGED.

• NOT PRIVILEGED IS:• Activity of a lawyer as member of the board of directors of a

company;• Activity of a lawyer when performing fiduciary services e.g. for

offshore entities• Activity of a lawyer as asset manager• In-house counsel of a corporation cannot invoke legal privilege!

Rights of Refusal of Parties and Witnesses

Absolute and Relative Right of Refusal of Parties and Witnesses (Art. 163, 165, 166 SCCP)

• Witnesses or third parties holding documentary evidence may refuse to cooperate with the court to the extent that the disclosure of a business or other secret would be punishable pursuant to article 321 of the Penal Code.

• The third party submitted to an obligation to report or released from the obligation to keep the secret has a duty to cooperate, unless it renders likely that the interest of the protection of secret is stronger than the interest to the manifestation of truth (art. 166 para. 1 b SCCP).

Discovery without teethwithout teeth against parties (Art. 164 SCCP)

• Unjustified refusal BY PARTY to produce documents upon order of the Court

• Consequence: NO CRIMINAL PENALTY; NO ENFORCEMENT OF THE COURT ORDER

• Art. 164 SCCP: The Court shall take (the refusal) into account when weighing the evidence

• Example: Court, if satisfied that document is in possession of the party, shall assume that the document has those contents as described by the counterparty; also applies to documents which have been unjustifiedly destroyed.

Discovery with teethwith teeth against third parties (Art. 167 SCCP)

• Unjustified refusal by third party to produce documents upon order of the Court

Consequences: • Administrative fine of CHF 1‘000.—;• Order of the court to comply with criminal

sanctions if failure to do so;• Forceful enforcement of court;• Bearing of court cost resulting from the failure to

comply.

5. Use of illegally obtained evidence in Swiss civil proceedings

Use of illegally obtained evidence in Swiss civil proceedings (Art. 152 sec. 2 SCCP)

• Art. 152 sec. 1 SCCP gives both parties the right to have all „suitable“ evidence timely submitted admitted and accepted by the court.

• Art. 152 sec. 2 introduces a right to have evidence illegally obtained considered by the court, to the extent that the interest in „finding the truth“ is predominant.

Balance of interest between „illegal act“ and „finding the truth“

• Judge has to balance the interests• Irrelevant, whether the breach committed to obtain the

evidence is being investigated or not• If illegal act led to a breach of the physical or

psychological integrity, then judge is unlikely to consider it

• If illegal act was a breach of an absolute or relative right to refuse giving evidence – judge will weigh these interest very high.

• Open question: Private investigator obtains information from Swiss banker in breach of banking secrecy laws: Can this information be used?

6. Conservatory measures; 

The new grounds for attachment;

New possibility of freezing state assets on the basis of an enforceable award under the new Lugano Convention

Conservatory MeasuresNew Safeguarding Measures under Art. 261 SCCP 

Safeguarding Measures under Art. 261 et seq. SCCP

The court can issue the necessary precautionary measures if the applicant can make plausible:(1) that a claim or right has been breached or a breach is to be expected; and(2) the breach will cause a damage which is not easily remediable.

Negative injunction preventing the defendant from changing the status quo and protecting an alleged right of the claimant in order to secure an effective enforcement in the future, once the disputed matter is determined on its merits (such as preservation orders restraining the defendant from disposing of real property)

•(i) the likelihood that the claim in the main trial is justified •(ii) the existence of an impending and not easily remediable damage, if the injunction is not granted•(iii) urgency in granting the provisional remedy

Conservatory measuresType of measures pursuant to Art. 262 SCPP (coupled with threat of criminal sanction under Art. 292 PC if not complied with – NO CONTEMPT OF COURT)

(a) Prohibition (b) An order to set aside an illegal situation(c) An order directed at a registry or at a third party to refrain from allowing or effecting any disposal

- Order to bank to freeze a certain account respectively to maintain status quo

- Prohibition to bank to release certain securities to one of the parties (d) The intermediate payment of a certain sum in the cases provided by law

- Support payment under family law for children…but…might apply e.g. to Dutch orders to effect certain contractual

payments pending the final determination of the case (Articles 289 to 297 of the Netherlands Code of Civil Procedure deal with a form of procedure known as `kort geding', which allows the President of the Arrondissementsrechtbank to grant enforceable measures `in all cases which, having regard to the interests of the parties, require an immediate measure on grounds of urgency' (Article 289(1)).

Monetary Claims: The Attachment Proceedings

If a claim for money is involved, the classic interlocutory order designed to secure its enforcement is the attachment order.

The attachment order (Séquestre, Arrest, Sequestro) is the classic interlocutory order designed to secure the enforcement of a claim for money.

•It causes a temporary freezing of assets located in Switzerland in order to secure a basis for subsequent enforcement, pending a final determination of the litigation on the merits in respect of a monetary claim only.

•A claimant will usually apply for an attachment as a pre-trial interlocutory order before a claim is filed, but attachments may also be obtained at any time after the filing of the main action in Switzerland or abroad as an ancillary remedy. The monetary claim for which an attachment order is sought must be prima facie due and payable

•The statutory basis for attachments is laid down in the Federal Act on Debt Collection and Bankruptcy of 11 April 1889 ("DCB"), specifically articles 271 to 281 DCB.

•To obtain an attachment order over assets of a defendant, an applicant must mandatorily show any of five conditions or reasons (Cas de séquestre, Arrestgründe, Cause di sequestro) allowing an attachment pursuant to article 271 DCB, namely:

Presently: 5 reasons for attachment

(1) the defendant has no fixed place of residence or abode anywhere, in Switzerland or abroad;

(2) the defendant has dissipated assets, flees or prepares to flee in order to defeat enforcement of undischarged debts;

(3) the defendant is in transit or is a person visiting markets or fairs, provided the relevant claim is of a nature that requires immediate payment;

(4) the defendant has no residence in Switzerland, no other reasons for an attachment are fulfilled, but the claim has a sufficient nexus with Switzerland or is based on an enforceable judgmenton an enforceable judgment or a written acknowledgment of debt;

(5) the creditor holds certificates of unsuccessful former enforcement in respect of undischarged debts of the debtor.

Attachments in fraud litigations: Difficulties

• In an international context, the principal ground usually relied upon is the absence of Swiss residence.

• The additional requirement of a sufficient nexus with Switzerland has not been defined by the legislator. Court practice has developed a number of factual circumstances which are deemed sufficient to establish such a nexus. If the claim is based on contract, then a nexus would be established if the contract was negotiated, concluded or performed, wholly or in part, in Switzerland, or Swiss law or an arbitration clause with seat in Switzerland was determined to be applicable to the contract or to any disputes arising out of it.

• In tort cases, the claimant would have to show that the activities leading to the tort claim were carried out, at least in part, in Switzerland.

• A fraud victim might not be able to obtain an attachment if the only nexus to Switzerland is constituted by the existence of a Swiss bank account, without any apparent evidence that any fraudulent activities were carried out in the country.

Application for attachment• The application for an attachment order is filed ex parte in

summary proceedings • Written submission that any one of the five conditions of article

271 DCB is met • prima facie case supporting a reasonable probability of a valid

claim • Establish by way of documentary evidence the number and

denomination of the Swiss account/asset to be frozen • The jurisdiction ratione loci is the court at the registered seat

of the bank • If an application is unsuccessful, the defendant is not notified,

giving the applicant the possibility to improve his application by filing a second, more documented version of it or by filing an appeal against the adverse decision of the lower court. As long as the applicant is not successful, the defendant is not notified of any applications filed

New Ground for Attachment under Art. 271 sec. 6 DCB

Coming into force as from 1st January 2011:New section 6: An attachment may be granted if the claimant disposes of a title for final enforcement under the DCB (i) enforceable court awards (on payment of a sum

of money);(ii) enforceable arbitration awards;

(iii) Resolutions and decisions of cantonal and federal authorities (including uncontested tax decisions);

(iv) enforceable public deeds.

Novelties provided under sec. 6 of Art. 271 DCB

• „Lugano“ court judgments are equivalent to Swiss judgments.(The Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 1988/2007, the latter applicable to EU including eleven new EU member states (Czech Republic, Cyprus, Slovakia, Slovenia, Hungary, Malta, Estonia, Latvia, Lithuania, Bulgaria and Rumania) plus Switzerland, Norway and Iceland (yet to be ratified)Judge granting the attachment effects an exequatur of the Lugano-judgment in ex parte proceedings.

Novelties provided under sec. 6 of Art. 271 DCB

NEW IS:- No absence of Swiss residence (Assets of Swiss residents might now become subject to attachment)

- No nexus to Switzerland needs to be shown (but assets in Switzerland need still to be identified);

- Urgency or threat of creditors‘ interest through a possible dissipation of assets by debtor no longer needs to be shown;- Order has Swiss-wide effect: Application might be brought in Zurich, but also address assets located in Geneva (but all assets still need to be identified

Freezing of State assets?

•The new ground for attachment gives the possibility, on the basis of an enforceable judgment rendered in a Lugano state against a foreign state, to freeze the assets of a foreign State in Switzerland.•Conditions:

– acta iure gestionis– assets to be attached are not used for any public purpose– thus far, nexus to Switzerland was required.

This is no longer the case. Swiss Department of Justice is presently drafting new guidelines on the procedure to be adopted, in line with Art. 271 sec. 6 DCB – during 2011

Outlook

• Non Lugano-judgments need first to go through (inter-partes) exequatur proceedings in order to be coupled with attachment proceedings

• Increase of attachment proceedings expected in Switzerland, in particular:

• - against Swiss citizens and residents;• - attachment by tax authorities for unpaid taxes now

possible;• -against assets of foreign states• - Creditor might freely decide which assets should be

frozen (improvement of negotiating position of creditors to obtain quicker discharge of debts)

No security for attachments under Sec. 6 of Art. 271 DCB

Security• The applicant who obtains an attachment order is liable

to both the defendant and to any third party affected for damages suffered as a result of an unjustified attachment.

• It lays within the discretion of the judge to order the claimant to post a bond as a security against such potential damage (usually 10% of the claim for which attachment is sought, to be put up usually by way of a cash deposit or a bank guarantee.

• Under the cases of sec. 6, unlikely that judges will ask for security from the applicant.